While the Internal Revenue Service has made some major steps forward on the technology front, some of the IT systems at the foundation of the tax processing system are so old that the agency is running out of employees who understand how they work, the agency’s commissioner said Thursday.

The IRS was one of the first big organizations in the world to adopt automated information processing, IRS’ Doug Shulman told a National Press Club luncheon. That was in the 1960s, when systems relied on paper punchcards and reels of magnetic tape. But even though those tapes have gotten smaller over the years, the core of the IRS IT enterprise still relies on technology that’s decades old.

“You might ask yourself why, and it’s a complicated question,” he said. “First, it works. Our original technologies that still hold hundreds of millions of taxpayer accounts were engineering marvels of their time. The problem is the people who remember how to use these systems is dwindling, and it’s very hard to keep them up and running. And we have a very complicated interrelated set of systems that have evolved on top of those systems. When you try to unbundle all of that, it makes the job even harder.”

Douglas Shulman, IRS commissioner (IRS photo) Shulman said there’s also been a longstanding reluctance to invest in new technology for the IRS. He said IT in his agency is, and long has been, dramatically underfunded.

Boost in IT funding

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“We currently spend less than 3 percent of our budget on long-term enhancements to our information technology infrastructure,” he said. “If you compare that to private sector financial institutions — none of which even come close to matching the number of customers we need to support — that percentage is shockingly low.”

The Obama administration’s budget request for next year includes a boost in IT funding for the IRS to start modernizing some of those old systems. The White House is asking for a 21 percent rise compared to what the agency got this year, for a total of more than $2.1 billion in the “information services” line item for IRS.

IRS though, like most other agencies, is already dealing with budget cuts in the current year. Appropriations made for fiscal year 2012 reduced the agency’s overall funding by $300 million and cut authorized staff by 3,600 full time employees. The agency is offering limited buyouts and early retirements to draw down its ranks.

But Shulman said IRS still has been able to make some significant advances on technology upgrades. In January, it flipped the switch on a new system called CADES2. The biggest difference is that data on tax returns is now updated daily rather than weekly, an upgrade the agency has wanted to make since the late 1980s.

“In the past, when you sent in your tax return, we’d receive it, but it would take a week before we processed it. Another week later, another part of the system would process it, and it would finally show up on our screens,” he said. “All we could tell you when you called us was to try calling us back in a couple weeks.”

Mandatory competency exams for tax preparers

Another recent change at IRS is a set of regulations that requires paid tax preparers to pass competency exams and take continuing education courses if they’re not already certified public accountants or attorneys.

“In most states, you need a license to cut somebody’s hair,” Shulman said. “But until recently, you didn’t need any sort of certification or testing or basic level of competency to file someone’s taxes.”

The IRS is facing a lawsuit that seeks to overturn those competency regulations. Shulman said he’s confident they’ll hold up in court, but he said the new measures are not just about consumer protection. Keeping closer tabs on tax preparers is also letting the agency begin data analytics projects and leverage its enforcement resources more effectively, he said.

Shulman said instead of dealing with problematic returns one by one, IRS wants to focus more resources on the preparers who consistently churn out filings that raise red flags, which is a wholesale, rather than retail approach to enforcement.

“We’ve quickly gone out to preparers and used a variety of compliance treatments to either stop fraudulent behavior or alert people to mistakes,” he said. “We’re testing different techniques on a much more real-time basis. Based on that, we’ll continue to feed that into our operations and evolve our programs. As we have a continuous feedback loop of data analytics, we’ll be able to drive that kind of learning into our operations.”

Besides beefing up what he says is an underweight technology budget, Schulman said Congress also needs to provide some certainty as to what tax laws and tax rates his agency’s workforce will actually be administering this year. Tax cuts from the Bush era are set to expire at the end of this year, as are the payroll tax cuts included in the Obama administration’s American Recovery and Reinvestment Act.

But most worrisome, he said, are a series of tax provisions that have already expired. If history is any guide, Congress will renew or extend some or all of them, perhaps at the last possible minute.

“If Congress can’t act until late in the year, say, after the election, we’re going to have a lot of real risk in the system,” he said.

In that case, the IRS would likely have to delay the start of the 2012 tax filing season.

“But if Congress doesn’t act before the end of the year and even starts to think about retroactive extensions to things like the (alternative minimum tax), you could have a real disaster in the filing season. It would be total confusion, where some people are filing under one law and some people are filing under another.”